How A Payday Loan Works

How Payday Loans Work

Payday loans are short-term cash loans based on the borrower's personal check held for future deposit or on electronic access to the borrower's bank account. Borrowers write a personal check for the amount borrowed plus the finance charge and receive cash. In some cases, borrowers sign over electronic access to their bank accounts to receive and repay payday loans.

Lenders hold the checks until the next payday when loans and the finance charge must be paid in one lump sum. To pay a loan, borrowers can redeem the check by paying the loan with cash, allow the check to be deposited at the bank, or just pay the finance charge to roll the loan over for another pay period.

Payday Loan Terms

Payday loans range in size from $100 to $1,500, depending on state legal maximums. The average loan term is about two-weeks. Loans cost on average 470% annual interest (APR). The finance charge ranges from $10 to $30 to borrow $100. For two-week loans, these finance charges result in interest rates from 390 to 780% APR. Shorter term loans have even higher APRs. The reason for these charges is the loans are smaller amounts and the people who have no other options available are given a loan. These people sometimes will default on thier loan and this results in higher fees.